Funding NATO

Member countries make direct and indirect contributions to the costs of running NATO and implementing its policies and activities.

Highlights

Indirect – or national – contributions are the largest and come, for instance, when a member volunteers equipment or troops to a military operation and bears the costs of the decision to do so.

Direct contributions are made to finance requirements of the Alliance that serve the interests of all 28 members - and are not the responsibility of any single member - such as NATO-wide air defence or command and control systems. Costs are borne collectively, often using the principle of common funding.

Within the principle of common funding, all 28 members contribute according to an agreed cost-share formula, based on Gross National Income, which represents a small percentage of each member’s defence budget.

Common funding arrangements are used to finance NATO’s principal budgets: the civil budget (NATO HQ running costs), the military budget (costs of the integrated Command Structure) and the NATO Security Investment Programme (military capabilities).

Projects can also be jointly funded, which means that the participating countries can identify the requirements, the priorities and the funding arrangements, but NATO provides political and financial oversight. The funding process is overseen by the North Atlantic Council, managed by the Resource Policy and Planning Board, and implemented by the Budget Committee and the Investment Committee.

In 2014, at the Wales Summit, NATO leaders tasked further work in the areas of delivery of common funded capabilities, reform governance and transparency and accountability, especially in the management of NATO’s financial resources.

When the NAC unanimously decides to engage in an operation, there is no obligation for each and every country to contribute to the operation unless it is an Article 5 collective defence operation, in which case expectations are different. In all cases, contributions are voluntary and vary in form and scale, from for instance a few soldiers to thousands of troops, and from armoured vehicles, naval vessels or helicopters to all forms of equipment or support, medical or other. These voluntary contributions are offered by individual Allies and are taken from their overall defence capability to form a combined Alliance capability.

The two per cent defence investment guideline

In 2006, NATO member countries agreed to commit a minimum of two per cent of their Gross Domestic Product (GDP) to spending on defence. This guideline principally served as an indicator of a country’s political will to contribute to the Alliance’s common defence efforts. Additionally, the defence capacity of each member country has an important impact on the overall perception of the Alliance’s credibility as a politico-military organisation.

The combined wealth of the non-US Allies, measured in GDP, exceeds that of the United States. However, non-US Allies together spend less than half of what the United States spends on defence. This imbalance has been a constant, with variations, throughout the history of the Alliance and more so since the tragic events of 11 September 2001, after which the United States significantly increased its defence spending. The gap between defence spending in the United States compared to Canada and European members combined has therefore increased.

Today, the volume of the US defence expenditure effectively represents 73 per cent of the defence spending of the Alliance as a whole. This does not mean that the United States covers 73 per cent of the costs involved in the operational running of NATO as an organisation, including its headquarters in Brussels and its subordinate military commands, but it does mean that there is an over-reliance by the Alliance as a whole on the United States for the provision of essential capabilities, including for instance, in regard to intelligence, surveillance and reconnaissance; air-to-air refuelling; ballistic missile defence; and airborne electronic warfare.

The effects of the financial crisis and the declining share of resources devoted to defence in many Allied countries have exacerbated this imbalance and also revealed growing asymmetries in capability among European Allies. France, Germany and the United Kingdom together represent more than 50 per cent of the non-US Allies defence spending, which creates another kind of over-reliance within Europe on a few capable European Allies. Furthermore, their defence spending is under increasing pressure, as is that of the United States, to meet deficit and indebtedness reduction targets. At the Wales Summit in 2014, NATO leaders agreed to reverse the trend of declining defence budgets and decided:

Allies currently meeting the two per cent guideline on defence spending will aim to continue to do so;

Allies whose current proportion of GDP spent on defence is below this level will halt any decline; aim to increase defence expenditure as GDP grows; and will move toward the two per cent guideline within a decade.

While the two per cent of GDP guideline alone is no guarantee that money will be spent in the most effective and efficient way to acquire and deploy modern capabilities, it remains, nonetheless, an important indicator of the political resolve of individual Allies to devote to defence a relatively small, but still significant, level of resources at a time of considerable international uncertainty and economic adversity.

The major equipment spending guideline

National defence budgets cover essentially three categories of expenditures: personnel expenses and pensions; research, development and procurement of defence equipment; and, lastly, operations, exercises and maintenance. Budget allocation is a national, sovereign decision, but NATO Allies have agreed that at least 20 per cent of defence expenditures should be devoted to major equipment spending, perceived as a crucial indicator for the scale and pace of modernisation.

Although investment across the Alliance in the development and procurement of defence equipment rose between 2003 and 2010 as a result of increases in spending by the United States, several other Allies also increased their equipment expenditures to meet the particular modernisation requirements associated with expeditionary operations in Afghanistan and elsewhere. Where expenditures fail to meet the 20 per cent guideline, however, there is an increasing risk of block obsolescence of equipment, growing capability and interoperability gaps among Allies, and a weakening of Europe’s defence industrial and technological base.

In September 2014 at the Wales Summit, NATO leaders agreed that Allies who are currently spending less than 20 per cent of their annual defence spending on major equipment will aim to increase this annual investment within a decade; Allies will also ensure that their land, air and maritime forces meet NATO agreed guidelines for deployability and sustainability and other agreed metrics; and they will ensure that their armed forces can operate together effectively.

Even though all Allies may not contribute forces to an operation, Allies have agreed that the funding for the deployment of the NATO part of a NATO-led operation would be commonly funded.

Direct financial contributions to NATO come principally in two different forms: common funding and joint funding. They can also come in the form of trust funds, contributions in kind, ad hoc sharing arrangements and donations.

Several factors influence the choice of funding source to address a given priority. These include the required level of integration or interoperability, affordability at the national level, the complexity of the system involved, and the potential for economies of scale. Often, a combination of funding sources is used.

The principle of common funding

When a need for expenditure has been identified, countries in the RPPB discuss whether the principle of common funding should be applied – in other words whether the requirement serves the interests of all the contributing countries and should therefore be borne collectively.

The criteria for common funding are held under constant review and changes may be introduced as a result of changing circumstances, for instance, the need to support critical requirements in support of Alliance operations and missions.

Common funding arrangements principally include the NATO civil and military budgets, as well as the NATO Security Investment Programme (NSIP). These are the only funds where NATO authorities identify the requirements and set the priorities in line with overarching Alliance objectives and priorities.

Where military common funding is concerned – the military budget and the NATO Security Investment Programme – the guiding principle for eligibility is the “over and above” rule:

“Common funding will focus on the provision of requirements which are over and above those which could reasonably be expected to be made available from national resources.”

Member countries contribute to NATO in accordance with an agreed cost-sharing formula based on Gross National Income.

The civil budget

The civil budget provides funds for personnel expenses, operating costs, and capital and programme expenditure of the International Staff at NATO Headquarters. It is financed from national foreign ministry budgets (in most countries), supervised by the Budget Committee and implemented by the International Staff. The civil budget for 2016 is € 222 million.

The civil budget is formulated on an objective-based framework, which establishes clear links between NATO’s strategic objectives and the resources required to achieve them. There are four frontline objectives and four support objectives. The frontline objectives comprise support for: active operations; Alliance capabilities; consultation and cooperation with partners; and public relations. The four support objectives consist in: providing support to the consultation process with Allies; maintaining the facilities and site of NATO Headquarters (Headquarters operational environment); governance and regulation through the monitoring of business policies, processes and procedures; and Headquarters security.

The military budget

This budget covers the operating and maintenance costs of the NATO Command Structure. It is composed of over 50 separate budgets, which are financed with contributions from Allies’ national defence budgets (in most countries) according to agreed cost-shares. It is supervised by the Budget Committee (with representatives from all NATO member countries) and implemented by the individual budget holders. In all cases, the provision of military staff remains a nationally-funded responsibility. The military budget for 2016 is € 1.16 billion.

The military budget effectively provides funds for the International Military Staff, the strategic commanders, the NATO Airborne Early Warning and Control (NAEW&C) Force, the common-funded portions of the Alliance’s operations and missions, and more specifically for:

the Military Committee, the International Military Staff and military agencies;

the two strategic commands and associated command, control and information systems;

the NATO Standardization Office, the NATO Communications and Information (NCI) Agency (Belgium) via its customers, Allied Command Transformation experimentation funds, the NATO Science and Technology Organization (Belgium) and the Centre for Maritime Research and Experimentation (Italy);

limited partnership support activities and part of the Military Liaison Offices in Moscow and Kyiv.

During a crisis-management operation, when an operational decision with financial implications is taken by the NAC, the RPPB is immediately consulted for the availability of funds. Effectively, this means that in the throes of a crisis, the RPPB can at times be in quasi-permanent session, as was sometimes the case for instance during the Libya operation (March-October 2011).

The NATO Security Investment Programme

The NATO Security Investment Programme (NSIP) covers major construction and command and control system investments, which are beyond the national defence requirements of individual member countries. It supports the roles of the NATO strategic commands by providing installations and facilities such as air defence communication and information systems, military headquarters for the integrated structure and for deployed operations, and critical airfield, fuel systems and harbour facilities needed in support of deployed forces.

The NSIP is financed by the ministries of defence of each member country and is supervised by the Investment Committee. Projects are implemented either by individual host countries or by different NATO agencies and strategic commands, according to their area of expertise. The 2016 ceiling for the NSIP is € 690 million.

Joint funding

Joint funding arrangements are structured forms of multinational funding within the terms of an agreed NATO charter. The participating countries still identify the requirements, the priorities and the funding arrangements, but NATO has visibility and provides political and financial oversight.

Joint funding arrangements typically lead to the setting-up of a management organisation within a NATO agency. NATO agency activities range from the development and production of fighter aircraft or helicopters to the provision of logistic support or air defence communication and information systems. NATO agencies also coordinate research and development activities or are active in the fields of standardization and intelligence-sharing.

Jointly funded programmes vary in the number of participating countries, cost-share arrangements and management structures.

Other forms of funding

In addition to common funding and joint funding, some projects can take the form of trust fund arrangements, contributions in kind, ad hoc sharing arrangements and donations. The most important trust fund is the one supporting the sustainment of the Afghan National Army.

Financial management within NATO is structured to ensure that the ultimate control of expenditure rests with the member countries supporting the cost of a defined activity, and is subject to consensus among them. Under the overall authority of the NAC, various bodies exercise managerial control over all four of the principal elements of the Organization’s financial structure:

the International Staff, financed by the civil budget;

the international military structure, financed by the military budget;

the NSIP; and

NATO agencies.

When cooperative activities do not involve all member countries, they are, for the most part, managed by NATO production and logistics programmes within NATO agencies. They have their own supervisory boards and boards of directors, as well as finance committees and distinct sources of financing within national treasuries.

Financial regulations applied at NATO provide basic unifying principles around which the overall financial structure is articulated. They are approved by the NAC and are complemented by rules and procedures adapting them to specific NATO bodies and programmes. In September 2014, NATO leaders decided to, inter alia, reform governance, transparency and accountability, especially in the management of NATO’s financial resources. This new drive for transparency and accountability aims to improve insight into how NATO manages, spends and reports on the use of taxpayer funds.

Financial management of the civil and military budgets

The civil and military budgets are annual, coinciding with the calendar year. Each budget is prepared under the authority of the head of the respective NATO body and is reviewed by the Budget Committee composed of representatives of contributing member countries, and approved for execution by the NAC.

Failure to achieve consensus before the start of the financial year entails non-approval of the budget and the financing of operations, under the supervision of the Budget Committee, through provisional allocations limited to the level of the budget approved for the preceding year. This regime may last for six months, after which the NAC is required to decide either to approve the budget or to authorise continuation of interim financing.

When the budget has been approved, the head of the NATO body has discretion to execute it through the commitment and expenditure of funds for the purposes authorised. This discretion is limited by different levels of constraint prescribed by the Organization’s financial regulations regarding such matters as recourse to competitive bidding for contracts for the supply of goods and services, or transfers of credits to correct over- or under-estimates of the funding required.

Financial management of the NATO Security Investment Programme

Implementation of the NSIP starts from capability packages. These packages identify the assets available to and required by NATO military commanders to fulfil specified tasks. They assess common-funded supplements (in terms of capital investment and recurrent operating and maintenance costs) as well as the civilian and military manpower required to accomplish the task. They are reviewed by the RPPB and then approved by the NAC.

Once they are approved, authorisation for individual projects can move forward under the responsibility of the Investment Committee. The “host nation” (a term which refers to either the country on whose territory the project is to be implemented, or a NATO agency or strategic command responsible for implementing a project) prepares an authorisation request. Once the Committee has agreed to the project, the host nation can proceed with its final design, contract award and implementation. Unless otherwise agreed by the Investment Committee, the bidding process is conducted among firms from those countries contributing to the project.

The financial management system which applies to the NSIP is based on an international financial clearing process. Host nations report on the expenditure foreseen on authorised projects within their responsibility. Following agreement of the forecasts by the Investment Committee, the International Staff calculates the amounts to be paid by each country and to be received by each host nation. Further calculations determine the payment amounts, currencies and which country or NATO agency will receive the funds.

Once a project has been completed, it is subject to a joint final acceptance inspection to ensure that the work undertaken is in accordance with the scope of work authorised. As soon as this report is accepted by the Investment Committee, it is added to the NATO inventory.

Financial control

With respect to the military and civil budgets, the head of the NATO body is ultimately responsible for the correct preparation and execution of the budget. The administrative support for this task is largely entrusted to the Financial Controller of the agency or NATO body.

Each Financial Controller has final recourse to the Budget Committee in the case of persistent disagreement with the head of the respective NATO body regarding an intended transaction. The Financial Controller is charged with ensuring that all aspects of execution of the budget conform to expenditure authorisations, to any special controls imposed by the Budget Committee, and to the financial regulations and their associated implementing rules and procedures. He may also, in response to internal auditing, institute such additional controls and procedures as he deems necessary for maintaining accountability.

The International Board of Auditors

The independent International Board of Auditors for NATO (IBAN) is responsible for auditing the accounts of the different NATO bodies. Its principal task is to provide the NAC and member governments with the assurance that joint and common funds are properly used for the settlement of authorised expenditure and that expenditure is within the physical and financial authorisations granted.

The Board’s mandate includes not only financial but also performance audits, which extend its role beyond safeguarding accountability to the review of management practices in general. IBAN is composed of officials normally drawn from the national audit bodies of member countries. These officials are appointed by and responsible to the NAC.

The NAC approves NATO budgets and investments, and exercises oversight over NATO financial management. It takes into account resource considerations in its decision-making. The RPPB advises the Council on resource policy and allocation. For example, when the Council decided to undertake the Libya operation, it did so with the benefit of a full evaluation of the costs from Allied Command Operations and the RPPB. The Budget Committee and the Investment Committee, which report to the RPPB, also review and approve planned expenditures.

The NATO Office of Resources brings together all members of the NATO International Staff working on resource issues. The office provides integrated policy and technical advice to the NAC and the Secretary General, NATO resource committees, and other NATO bodies. The office facilitates agreements on resource matters among member countries.

The Resource Policy and Planning Board

The Resource Policy and Planning Board (RPPB) is the senior advisory body to the NAC on the management of all NATO resources. It has responsibility for the overall management of NATO’s civil and military budgets, as well as the NSIP and manpower. Both the Budget Committee and the Investment Committee report to the RPPB.

The Budget Committee

The Budget Committee is responsible to the RPPB for NATO’s civil and military budgets. The civil budget covers all costs related to NATO’s International Staff at NATO Headquarters in Brussels; the military budget covers all costs related to the International Military Staff at NATO Headquarters, the strategic commands and the NATO Airborne Early Warning and Control (NAEW&C) Force.

The Investment Committee

The Investment Committee is responsible to the RPPB for the implementation of the NSIP.

The NSIP finances the provision of the installations and facilities needed to support the roles of the two strategic commands – Allied Command Operations and Allied Command Transformation – recognised as exceeding the national defence requirements of individual member countries.